SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 1 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 2
(a) Shekhani Limited
Statement of Cash Flows
for the year ended June 30, 2018
Rs. ‘000’
Cash Flows from Operating Activities:
Profit before tax 93,000 0.5
Adjustments for:
Depreciation charge 45,000 0.5
Loss on sale of property, plant and equipment (PPE) 6,000 0.5
Interest payable 2,250 0.5
Increase in inventories (Rs.108,000 – Rs.90,000) (18,000) 0.75
Increase in accounts receivable (Rs.120,000 – Rs.105,000) (15,000) 0.75
Increase in accounts payable (Rs.109,500 – Rs.90,000) 19,500 0.75
Cash generated from operations 132,750 0.25
Interest paid (2,250) 0.5
Income taxes paid [W-2] (28,500) 0.25
102,000 0.25
Cash Flows from Investing Activities:
Cash purchase of PPE [W-1] (120,000) 0.25
Disposal proceeds of PPE 24,000 0.5
(96,000) 0.25
Cash Flows from Financing Activities:
Repayment of bank loan [W-5] (30,000) 0.25
Proceeds of share issue (Rs.15,000 + Rs.15,000) [W-5] 30,000 0.5
Dividend paid [W-5] (42,000) (42,000) 0.5
Increase in cash and cash equivalents (–Rs.30,000 – Rs.6,000) (36,000) 0.5
Cash and cash equivalents – opening balance 30,000 0.5
Cash and cash equivalents – closing balance (6,000) 0.25

Workings: Rs. ‘000’

W-1: Property, Plant and Equipment (PPE) additions in the year:
PPE – opening balance 279,000 0.5
Less: disposals (Rs.24,000 + Rs.6,000 loss) (30,000) 0.5
Less: depreciation charge (45,000) 0.5
Revaluation in year 6,000 0.5
Cash paid for PPE additions 120,000 0.5
PPE-closing balance 330,000

W-2: Income Tax Paid:

Income tax liability – opening balance 30,000 0.5
Income tax charge for the year per statement of profit or loss 18,000 0.5
Cash paid in year (28,500) 0.5
Income tax liability closing balance 19,500

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 2 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Rs. ‘000’
W-3: Bank Loan – Amount Repaid:
Bank loan – opening balance 51,000 0.5
Cash paid (30,000) 0.5
Bank loan – closing balance 21,000

Share Share
W-4: Issue of Shares in the Year:
Capital Premium
Opening balance 45,000 9,000 0.5
Proceeds of shares issue – during the year 15,000 15,000 0.5
Closing balance 60,000 24,000 0.5

W-5: Dividend Paid:

Retained earnings – opening balance 255,000 0.5
Profit after tax – for the year 75,000 0.5
Cash dividend paid (42,000) 0.5
288,000

(b) Explanation of Financial Terms: 06

Revenue Reserves:
A revenue reserve is an account to which an amount has been voluntarily transferred from
retained profits to an appropriate reserve account. The reserve may be for some particular
purpose, such as a foreign exchange reserve account, or it could be a general reserve account
that could be used for any purpose.
General Reserve:
A general reserve is one that can be used for any purpose. For example, it may be needed
because of the effect of inflation. Transferring annual amounts of profit to a general reserve
instead of paying them out as dividends is one way to help overcome this problem.
Capital Reserves:
A capital reserve is a reserve which is not available for cash dividends. Most capital reserves
can never be utilised for cash dividend purposes.
Revaluation Reserves:
Where an asset has been revalued, an increase is shown by a debit in the requisite asset
account and a credit to a revaluation reserve account.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 3 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 3
(a) Journal Entries – Rectification of Errors:
Rupees
Particulars Debit Credit
(i) Purchases 15,000 0.5
Suspense Account 15,000 0.5

(ii) Supplier/ Accounts Payable 30,000 0.5

Suspense Account 30,000 0.5

(iii) Plant and Machinery 45,000 0.5

Repair Expense 45,000 0.5
(iv) Suspense Account 50,000 0.5
Customer/ Accounts Receivable 50,000 0.5

(v) Sales 200,000 0.5

Plant and Machinery Disposals 200,000 0.5
(vi) Accounts Receivable 75,000 0.5
Suspense Account 75,000 0.5

(vii) Suspense Account 4,000 0.5

Customer/ Accounts Receivable 4,000 0.5

Suspense Account Rupees

Particulars Debit Particulars Credit
Opening balance 66,000 (i) Purchases 15,000 01
(iv) Accounts receivable 50,000 (ii) Supplier/ accounts payables 30,000 01
(vii) Accounts receivable 4,000 (vi) Accounts receivable 75,000 01
120,000 120,000

(b) Suspense Accounts: 04

A suspense account is an account in which debits or credits are held temporarily until sufficient
information is available for them to be posted to the correct accounts.
There are two main reasons why suspense accounts may be created:
 On the extraction of a trial balance the debits are not equal to the credits and the difference
is put to a suspense account.
 When a bookkeeper performing double entry is not sure where to post one side of an entry
they may debit or credit a suspense account and leave the entry there until its ultimate
destination is clarified.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 4 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 4
(a) Providence Club
Receipt and Payment Account
for the year ended December 31, 2018
Receipts Rupees Payments Rupees
Opening balance (bal figure) 54,400 Salaries (W-3) 472,000 0.75
Subscriptions (W-2) 653,600 Printing and stationery 24,000 0.5
Entrance fees 16,000 Postage 2000 0.5
Contribution for dinner 144,000 Telephone 6,000 0.5
General expenses 48,000 0.25
Audit fees 8,000 0.25
Annual dinner expenses 100,000 0.25
Interest and bank charges 22,000 0.25
Sports equipment (W-4) 72,000 0.25
Closing balance 114,000 0.25
868,000 868,000 0.5

Providence Club
Balance Sheet
as at December 31, 2018
Rupees
Assets Liabilities
Fixed Assets: Capital fund
Building 760,000 Opening balance (W-1) 882,400 0.75
Sports equipment: Add: Surplus 120,000 1,002,400 0.5
Opening balance 208,000 Bank loan 120,000 0.5
Addition 72,000 Current Liabilities: 0.25
280,000 Salaries payable 32,000 0.25
Less: Depreciation (28,000) 252,000 Audit fees payable 10,000 0.75
Current Assets: Subscriptions received in advance 33,600 0.25
Cash in hand 114,000 0.25
Subscriptions due 72,000 0.25
1,198,000 1,198,000 0.5

W-1: Providence Club

Balance Sheet
as at December 31, 2017
Rupees
Assets Liabilities
Building 760,000 Capital fund (bal figure) 882,400 0.75
Sports equipment 208,000 Bank loan 120,000 0.5
Cash in hand 54,400 Salaries payable 24,000 0.5
Subscriptions due 64,000 Audit fees payable 8,000 0.5
Subscriptions received in advance 52,000 0.25
1,086,400 1,086,400 0.5

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 5 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
W-2: Subscriptions:
Rupees
As per Income & Expenditure A/c 680,000 0.25
Add: Subscriptions outstanding on Dec 31,2017 64,000 0.25
744,000
Add: Subscriptions received in advance on Dec 31,2018 33,600 0.25
777,600
Less: Subscriptions received in advance on Dec 31,2017 (52,000) 0.25
725,600
Less: Subscriptions outstanding on Dec 31,2018 (72,000) 0.25
653,600 0.25

W-3: Salaries:
Rupees
As per Income & Expenditure A/c 480,000 0.25
Add: Outstanding of 2017 24,000 0.25
504,000
Less: Outstanding of 2018 (32,000) 0.25
472,000 0.25

W-4: Sports Equipment:

Rupees
Closing balance 252,000 0.25
Add: Depreciation 28,000 0.25
280,000
Less: Opening balance (208,000) 0.25
Purchases 72,000 0.25

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 6 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 5
(a) Adnan Brothers
Statement of Financial Position
as at June 30, 2018
Rs. ‘000’
Assets
Non-current assets
Fixtures and fittings at cost 22,400 0.5
Less: Accumulated depreciation (12,800) 9,600 0.5
Motor vehicles at cost 38,400 0.5
Less: Accumulated depreciation (21,760) 16,640 0.5
26,240
Current assets
Inventory 14,400 0.5
Account receivables 16,640 0.5
Prepayment 1,440 0.5
Cash 3,936 36,416 0.5
Total assets 62,656 0.5
Equity and Liabilities
Equity
Proprietor’s capital as at June 30, 2018 (balancing figure) 44,416 01
Liabilities
Current liabilities
Accounts payable 11,840 0.5
Accrued rent 6,400 0.5
Total liabilities 18,240
Total equity and liabilities 62,656 0.5

(b) Fluctuating Capital Account

Rupees
Mr. Basim Mr. Farhan Total
Capital 300,000 300,000 600,000 01
Drawings (50,000) (70,000) (120,000) 01
Salary – 25,000 25,000 01
Share of profit 36,000 24,000 60,000 01
Total 286,000 279,000 565,000 01

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 7 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 6
(a) Bhoy Limited
Consolidated Statement of Profit or Loss
for the year ended June 30, 2018
Rs. ‘000’
Revenue (170,000 + 84,000 – 12,000 intra-group sales) 242,000 01
Cost of sales (126,000 + 64,000 -12,000 + 500) (178,500) 01
Gross profit 63,500 0.25
Distribution costs (8,000 + 7,000) (15,000) 0.5
Administrative expenses (16,000 + 2,000) (18,000) 0.5
Finance costs (1200 + 800) (2,000) 0.5
Profit before tax 28,500 0.25
Income tax expense (4,324 + 2,000) (6,324) 0.5
Profit for the year 22,176 0.25
Attributable to:
Equity holders of the parent 19,096 0.5
Non-controlling interest (8,200 – 500 URP) x 40% 3,080 01
22,176

Bhoy Limited
Consolidated Statement of Financial Position
as at June 30, 2018
Rs. ‘000’
Assets
Non-current assets
Property, plant and equipment (PPE) (81,200 + 25,200) 106,400 0.5
Goodwill (W-2) 18,200 0.25
124,600 0.25
Current assets (W-6) 44,700 0.25
Total assets 169,300 0.25
Equity and liabilities
Equity
Equity attributable to owners of the parent
Equity shares of Rs.10 each (20,000 + 3,200) 23,200 0.5
Share premium 16,000 0.5
Retained earnings (W-4) 75,420 0.25
114,620
Non-controlling interest (NCI) (W-3) 14,880 0.25
Total equity 129,500 0.25
Liabilities
Non-current liabilities – 10% loan notes (6,000 + 8,000) 14,000 0.5
Current liabilities (16,400 + 9,400) 25,800 01
Total liabilities 39,800
Total equity and liabilities 169,300 0.25

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 8 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
W-1: Net Assets of Mirza & Sons:
Rs. ‘000’
At Acquisition At Reporting Date
Share capital 8,000 8,000 0.5
Retained earnings 4,800 13,000 0.75
URP (W-5) (500) 0.25
12,800 20,500 0.5

W-2: Goodwill:
Rs. ‘000’
Parent holding (investment) at fair value:
Share exchange ((800 x 60%) x 2/3 x Rs.60 ) 19,200 01
NCI value at acquisition 11,800 0.25
31,000 0.25
Less:
Fair value of net assets at acquisition (W-1) (12,800) 0.5
18,200 0.25

Share consideration given on the acquisition has not been recorded. Therefore, share
capital should be increased by Rs.3,200 [(800 x 60%) x 2/3 x Rs.10] and share premium
should be increased by Rs.16,000 [(800 x 60%) x 2/3 x Rs.50]. 01

W-3: Non-Controlling Interest (NCI):

Rs. ‘000’
NCI value at acquisition 11,800 0.25
NCI share of post-acquisition reserves (20,500–12,800)x 40% 3,080 01
14,880 0.25

W-4: Consolidated Retained Earnings:

Rs. ‘000’
Bhoy Limited 70,800 0.25
Mirza & Sons [(20,500 – 12,800) x 60%] 4,620 01
75,420 0.25

W-5: Unrealized profit on inventory (URP):

The unrealized profit in inventory is calculated as 12,000 /1.2 x 20% = Rs.2,000.
1.5
Unrealized profit is Rs.2,000 x 25% = Rs.500

W-6: Current Assets:

Rs. ‘000’
Bhoy Limited 32,000 0.25
Mirza & Sons 13,200 0.25
URP (W-5) (500) 0.25
44,700 0.25
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 9 of 9

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
(b) Goodwill: 04
The value of a company will normally exceed the value of its net assets. The difference is
goodwill. This represents assets not shown in the statement of financial position of the acquired
company such as the reputation of the business, brand and the experience of employees.
Goodwill arises because the investor would rather buy a readymade and established business
than buy the individual components and set up the business themselves from nothing.

THE END

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.